Returns on savings in danger of turning negative

By FINTAN TAN
WHEN external demand dries up, most governments of export-reliant countries aim to increase domestic demand by encouraging private consumption while ramping up public spending.
Besides fiscal measures, they have lowered key policy rates, which in turn triggered cuts in the commercial lending rates as well as the rates for savings. These cuts in interest rates worldwide have put the returns on savings in danger of turning negative, if it has not already.
In the euro-zone, the interest rate is now 1.5% after the European Central Bank cut its benchmark rate by 50 basis points on March 5.
On the same day, the Bank of England cut interest rates to 0.5%, the lowest since the bank’s founding in 1694. In the US, the federal funds rate is now zero, after the Federal Reserve cut the rates from 1% in mid-December last year.
Since November, Bank Negara has cut its key policy rate, the overnight policy rate, by 150 basis points to 2.0%. Following the cuts, the base lending rate, which is the benchmark commercial lending rate, also fell. It now averages 5.55%, according to bankinginfo.com.my.
The average rate on a conventional one-year fixed deposit (FD) account for most banks have fallen to 2.50% payable at maturity from 3.70% to 3.75% a year ago.
While the threat of crippling inflation has fallen by the wayside, there is still residual inflation. The consumer price index (CPI) increased in January by 3.9% to 111.7, compared to a year ago, due to increases in the prices of food and fuel.
The real interest rate is the rate after deducting tax and the rate of inflation. That means savers are getting a negative rate of return if one takes into account the inflation rate as measured by the CPI and compares it with the current one-year FD rate. In fact, for last year, it was minus 1.7%.
Some experts say that we just have to bite the bullet.
Fair enough, if one is young and have 25 to 35 years of employment and hopefully, saving and investment opportunities, in the future.
For savers, whether working or retired, the drop in the FD rates is not a good thing even though it is unavoidable. For those who have retired and are relying on their interest income, this will be especially hard.
If they have investments – which to the average Malaysian, are in the form of equities and property – they would have suffered losses. Inflation would have also eroded the value of government bonds, even if held to maturity. But government savings bonds, at least for the risk-averse, are still the safest.
That is why in January, the Government announced it would be issuing up to RM2bil in bonds aimed at people aged 56 and above as well as those who have retired on medical grounds.
Bon Simpanan Malaysia has a three-year tenure and offers a return of 5% per annum with flexibility for early redemption before maturity.
But as a reader pointed out in a letter to The Star in January, applicants are only allowed to subscribe up to RM50,000. He said that the Government should consider doubling the bond issuance to RM4bil and allow senior citizens to subscribe up to RM100,000. Even then, he worked out that the return will only be RM416 a month based on the RM100,000 principal sum.
The Government also announced that as part of the RM60bil stimulus package, it will issue up to RM5bil in saving bonds this year for people aged 21 and above with a maturity period of three years and an annual return of 5% to be paid quarterly.
In such a fluid environment, where recent economic indicators, whether domestic or external, have been bleak, any sort of opportunity to save for the future is welcomed, especially if it’s considered “safe”.
The situation for those who are working and contributing to the Employees Provident Fund (EPF) is just as dire. The EPF said last month that investment income for the third quarter of 2008 plunged 60.4% compared to the same period a year ago.
EPF contributors cannot expect a dividend payout similar to that for 2007, when the pension fund announced a 5.8% dividend, but it should not go below 2.5%, the minimum rate set by law.
For those who are relying merely on their EPF savings for their retirement, reports and studies have already shown that it is thoroughly inadequate.
When and if this blip in EPF dividend payouts is factored in, coupled with residual inflation, contributors may not be seeing much in terms of returns over the next few years, since economists have said that this will be a long drawn-out recession. Savers, prepare to batten down for the storm.
Source: The Star , 14 March 2009

Did Ka-shing diversify enough?

COMMENT By TAY HAN CHONG

Time to review our portfolios and consider the alternatives available.
ARE you richer than Li Ka-shing? I suspect not, but if you have not lost half of your wealth in 2008, then you are actually better off than he is!
All right, I am stretching the comparison to the point of breaking, but the truth is, Li did lose 50% of his wealth last year, leaving him with only US$16.2bil.
Naturally we all think that he has already got more than enough for a few lifetimes, even if he had lost more than 50%.
However, that is not the point here. No matter how much or little, it is always painful to lose money.
In comparison, many seemed to have done better than Li in this period.
While comparing with someone who has lost more money may give us a lot of comfort, there’ll always be someone else who has done better – such as those who kept their money in cash over the last two years.
But are such comparisons relevant and fair? While I can name many people who have made it big investing, I cannot name one person who has grown wealthy through savings in cash alone.
Few can claim to have done better than Li during the good times.
So how did many investors out there lose less money than Li (in percentage terms, of course)?
He lost a lot through his equity in Cheung Kong (Holdings) Ltd and Husky Energy Inc, his two largest holdings.
In a way, he has a concentrated portfolio. When your bets are right, a concentrated portfolio can yield great results. But it is a double-edged sword that cuts both ways.
Here are some examples.
· If one held 100% of one’s investments in US bank stocks only, 2008 would have seen a loss of at least 60%.
· If the investment portfolio was 50% invested in US banks and the other 50% in US Treasury, straight off, the 2008 performance would have been -25% (or more than twice as good, though still painfully negative).
· If the portfolio is equally invested in US banks, US Treasury and gold, then the 2008 performance would have been -16%, an even better performance (though still negative)!
What I have illustrated above is a simple application of diversification of investments.
When you have more asset classes that are not correlated strongly to one another, you will reap the benefits of diversification.
With diversification, it is almost always possible to achieve a superior portfolio compared to holding only one asset class.
A superior portfolio is one where for the same risks, you can get a higher expected return; or for the same expected returns, you could experience a lower risk.
The idea of diversification itself is not a new concept. Old wisdom has left us with the advice of not putting all your eggs in one basket.
Academia has presented numerous studies which show that asset allocation is one of the most important aspects in investments.
In the past, the process of diversification would have been only accessible to a select few through exclusive banking or investment services.
Today, many alternative investments are now accessible to the man on the street through indexes, tracker funds, unit trust funds and/or alternative depository products.
However, most Malaysian portfolios continue to be dominated by equities and depository products only.
Perhaps it is time to review our portfolios and consider alternatives available to us to make our portfolios less risky and more diversified.
As the famous investment guru John Bogle once said, “The best time to invest is today”.
So start reviewing your portfolio and introduce some diversification.
Perhaps in a couple of years we can beat Li in good times, even if it’s in percentage rather than absolute terms!

Source : The Star, 14 March 2009

Unit trust industry stable with record sales of RM18bil

By LAALITHA HUNT
KUALA LUMPUR: There has not been any panic selling in the local unit trust industry as redemption rates are at an average of 2% of total fund size per month, said Federation of Malaysian Unit Trust Managers (FMUTM) president Tunku Yaacob Tunku Abdullah.
The local unit trust industry had continued to record net sales of nearly RM18bil in the first 10 months of 2008, he noted.
However, the total NAV (net asset value) of the unit trust industry as at end 2008 slid RM34bil or 20% from RM169bil in 2007.
“However, this decline was relatively less severe compared to the drop in commodity and stock-market indices,” Tunku Yaacob said after the Morningstar 2008 Fund Awards presentation here yesterday.
“Going forward, we expect redemption rates to be maintained and sales to improve this year.”
From 2001 to 2007, the Malaysian unit trust industry had enjoyed double digit growth in NAV, from RM43bil in 2001 to RM169bil in 2007.
Tunku Yaacob also said he did not see the Kuala Lumpur Composite Index dropping below 850 points.
US-based Morningstar Inc chief financial officer Scott Cooley said the long term prospects for unit trust funds were still bright despite the current downturn in comparison with other asset classes.
“US equities have lost more than 50% of their value since October 2007.
“Besides that, out of 10,691 US equities, 2,886 lost over 75% of their value last year. In comparison, out of 15,272 mutual funds, only one lost more than 75% of its value,” Cooley noted.
For the Morningstar 2008 Fund Awards, winning funds were determined based on their delivery of risk-adjusted returns over the past year and their consistency over the longer term.
Seven awards covering three categories, namely equity, fixed income and balanced fund, were given out, with Islamic funds dominating the awards.
ASM Investment Services Bhd was named the winner for its Islamic syariah equity fund, while MAAKL Mutual Bhd took the award for its ringgit bond fund under the fixed income category.
RHB Investment Management Sdn Bhd won the award for the balanced fund category for its RHB Mudharabah Fund.
Tunku Yaacob noted that Islamic funds had turned out to be more resilient and were shielded from some of the huge portfolio losses that conventional funds had encountered.
“This could be due to the fact that Islamic funds were not permitted to have any exposure to conventional banking and financial equities, which had taken a beating as a result of the current crisis,” he said.

Source : The Star 12 March 09